Beige Book Report: San Francisco
September 11, 1996
Summary
Reports from 12th District contacts indicate continued strong growth
in California and the District as a whole, although with some
moderation among states that have been growing the fastest. District
manufacturing activity was robust overall but tempered slightly by
weakness in some sectors, notably in the market for computer memory
chips. Sales of retail items and services were strong. District real
estate markets were tight in general, with residential sales in
California exhibiting signs of a pickup. Despite some reports of
labor shortages and rising labor costs, price pressures were
reported to be modest overall, with the exception of noticeable
increases in grocery prices.
Business Sentiment
District respondents expect solid national and regional economic
performance in the near term. Most respondents expect that national
unemployment will remain stable and national GDP will continue to
grow moderately; among the respondents expecting a change, more
expect improvement than deterioration. In contrast, although 55
percent of respondents expect inflation to remain constant during
the next 12 months, nearly 40 percent expect it to accelerate. With
regard to regional conditions, over three-quarters of the
respondents expect growth in their area to continue outpacing
national growth. Respondents' expectations regarding District
business investment are particularly favorable, with nearly 60
percent expecting acceleration, but their expectations regarding new
housing starts in the District are somewhat less optimistic than
they were earlier in the summer.
Retail Trade and Services
Sales by retail and service establishments were healthy throughout
the District. Respondents from several states reported large
increases in retail sales relative to year-ago levels. Grocery sales
were strong in most of the District, and respondents noted grocery
store expansion plans in several states. Moreover, prices on some
items-particularly fruits and vegetables and dairy products-rose
noticeably. In California, strong demand for telecommunications
services continued, and several District states benefited from
expanding computer software development and sales. Southern
California port traffic was heavy, and significant expansion of
terminal facilities and other infrastructure is underway there.
Hotel occupancies and other tourism trade were strong in several
states, such as Utah and Hawaii, although higher hotel rates and a
weakened Japanese currency have increased effective tour prices in
the latter state.
Manufacturing
The manufacturing sector exhibited substantial strength in most
areas of the District, although a primary exception was continued
slack in the computer memory chip industry. In Washington, a large
order backlog at Boeing has led to significant new hiring and
equipment expansion by that company and some of its suppliers, such
as electronics equipment manufacturers. In addition, several
respondents noted wage pressures and difficulties finding qualified
personnel in the state. Sales were very strong for heavy
construction machinery and machine tools, with growing foreign
orders offsetting slowed domestic demand growth for the latter.
Sporting goods manufacturers have been expanding in Washington and
in the southernmost portion of California. However, weakness was
reported among heavy truck and aluminum manufacturers in Washington.
In the Pacific Northwest more generally, lumber demand was high,
reportedly due to growing demand for construction lumber, but pulp
and paper markets were weak and characterized by rising inventories.
High-tech manufacturing activity was mixed in the region. Some companies in the San Francisco Bay Area-particularly those that supply production equipment to computer memory chip manufacturers- recently have cut staff and delayed building plans. However, reports of cutbacks by semiconductor manufacturing firms were offset by reports from respondents in several states of continued expansion among makers of other high-tech product lines.
Agriculture and Resource-Related Industries
District agricultural production and sales were solid overall,
although some crops were affected by recent hot weather in
California. Reports indicated good grain harvests in Washington,
Idaho, and Utah, and nut and cotton yields were high in California.
Due to hot weather, several California fruit crops have come in
prematurely, although the impact on yield size and quality
reportedly has been limited. Despite a recent small increase in beef
cattle prices, the District's struggling cattle industry has been
hurt by reductions in exports to Japan due to a scare about
contaminated beef in that country.
Real Estate and Construction
Residential and commercial real estate markets were tight in most
areas of the District, although commercial construction reportedly
has cooled in some locales. Residential construction has improved in
much of California, due to the state's economic resurgence. Public
works construction in California also is up, including a major
freeway reconstruction project in San Francisco. In the broad San
Francisco Bay Area, commercial vacancies were low, but rental rates
remained stable and new building was limited. Commercial real estate
markets tightened in Washington, and lease rates rose there. In
contrast, although current and planned construction remain at high
levels in Utah, construction activity and housing price appreciation
have decelerated there.
Financial Institutions
District financial institutions registered solid performance. Retail
and commercial loan demand was reported at "all time highs" by a
bank that covers much of the District, and deposit growth was
unusually rapid. Banks in Southern and Central California reported
modestly improved conditions. The strong District financial outlook
was tempered only by margin pressures on banks in accelerating
growth areas such as Washington, and by reports of substantially
increased bankruptcy filings in Idaho and Utah.